UPS Cuts Profit Outlook on Costs for Holiday Shipments

United Parcel Service Inc. lowered its full-year profit outlook as the company boosts spending to help handle booming demand for fast shipping during the holidays. The shares tumbled the most in more than a year.

The company now forecasts earnings per share to be $4.90 to $5, it said in its second-quarter statement today. That’s lower than the outlook the Atlanta-based company gave in April of $5.05 to $5.30 a share.

UPS said it plans to spend $175 million on improving its shipping during the holiday crush, specifically expanding operations on the day after Thanksgiving, and upgrading its Orion software that helps plot the best route for drivers. Last year, harsh winter weather and a last-minute surge in online orders caused UPS to miss some Christmas deliveries.

Kevin Sterling of BB&T Capital Markets in Richmond, Virginia, and Ben Hartford of Robert W. Baird & Co. in Milwaukee said analysts and investors wonder if and when UPS will profit from the investments to its network. For now, those investments are dragging down earnings.

“What’s clear is the market is very competitive, and UPS is appropriately responding to it,” Hartford said in a telephone interview. “But from an investor’s point of view, will the changes being made result in additional profit?”

UPS fell 3.7 percent to $98.86 in New York. The shares are down 5.9 percent this year, compared with a 6.6 percent increase in the Standard & Poor’s 500 Index.

Proper Steps

UPS is ahead of schedule in its winter peak-season planning, David Abney, who will become chief executive officer on Sept. 1, said on a conference call with analysts. The company said earlier this year it planned to spend $100 million to ensure a smooth holiday season and today bumped that up by $75 million.

The company may evaluate holiday pricing, with a seasonal surcharge “possible” if UPS has to spend heavily again next year to deal with the peak season, current CEO Scott Davis said on the call.

“As we’ve said, 2014 is the year of investing for the customer,” Davis said in a statement. “We are providing new capabilities and expanding capacity to ensure UPS meets the rapidly growing needs of the marketplace.”

Cheaper Shipping

UPS, the world’s largest package delivery service, has also been battling a shift to cheaper two-day and deferred shipping for more than a year. Executives today said the movement is hurting profit margins.

In the second quarter, domestic daily package volume rose 7.4 percent, led by gains in ground and deferred shipments. Revenue per package declined, as customers increasingly sent items via its more economical SurePost service which relies on the U.S. Postal Service for the last mile of delivery.

Last month, UPS said it would begin charging for ground-shipped packages by size, not just weight, as it seeks to increase revenue and reduce costs. The changes won’t come until after the holiday crunch.

UPS already uses so-called dimensional pricing for packages carried in its air network and larger pieces shipped by ground. Rival FedEx Corp. is shifting to a similar charging system, as it too seeks to improve profitability of business-to-consumer shipments.

‘Inefficiently Packaged’

“It was in response to customers choosing lower-yielding delivery options,” said Hartford. On balance, the business-to-consumer shipments “are inefficiently packaged, and therefore they consume a disproportionate amount of capacity in their delivery trucks.”

Hartford rates UPS shares neutral, while Sterling has them as hold.

UPS’s earnings per share excluding some costs and gains were $1.21 in the second quarter, the company said. That missed the $1.25 average estimate from 23 analysts compiled by Bloomberg.

Net income fell 58 percent to $454 million, or 49 cents a share, from $1.07 billion, or $1.13, a year earlier. The results in the most recent quarter included an after-tax charge of $665 million related to a change in post-retirement health-care benefits. Profit excluding that cost was $1.1 billion, UPS said.

Additional expenses to improve rail service and investments to expand network capacity weighed on results in domestic package shipments, the company said.

UPS cited growth in U.S. e-commerce shipments and international export business for helping to boost global package shipments by 7.2 percent. Revenue across all of its business segments rose 5.6 percent to $14.3 billion from $13.5 billion a year earlier.

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